The next lever of value creation By Dr Sabine Dembkowski / Managing Partner of Better Boards / www.better-boards.com
he challenges associated with value creation drive us all in Private Equity (PE). Any investment professional is eager to make their mark by delivering great returns. When analysing how these returns are achieved one soon discovers that the vast majority of investment professionals rely on financial engineering and operational improvements. These are, of course, the basics of the trade. True mastery is, however, achieved by adding more tools and techniques to the basic repertoire of value creation. Even better when the tools satisfy the needs of other stakeholders and support you in your fundraising efforts. In this article I would like to focus on the insight gained from developing more effective boards. I am not talking about “leadership development programmes”,
rather a fully integrated approach to value creation, that is grounded in data and does not only ensure greater value creation but also brings governance to life, enhances the story of fundraising and differentiates a firm in the eyes of its management. It underpins a genuinely collaborative approach and provides management with a unique development opportunity. Let’s first have a closer look at where and how the value is created. The main pillar of the PE operating model and a key belief of investors is having the right management team in place. However, statistics show a different picture. Over the lifespan of an investment there is a CEO turnover rate of over 50% and an even higher number relating to other board members compared to a 15% rate in the world’s 2,500 largest public companies. In around 50% of the cases the change in CEO was not planned
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and is due to underperformance of the individuals. This ‘underperformance’ is, in many cases, simply caused by a mismatch of the skill set with the requirements after a change in strategy, ‘human incompatibility’ with other board members, the incapability to gain the trust of the shareholder, lacking empathy to convince within the organisation and not acting as a role model for the employees – to name a few. Given that management is the key enabler and driver of value creation it is quite surprising how little effort is presently put into the systematic development of executive boards of portfolio companies considering they are supposed to be the key drivers of value creation in the portfolio organisation. Having said that, I also have to confess that many development programmes or board audits offered are ill-suited to drive value creation.